Unsecured Trade Creditors

Recently, in In re Faulkner, the Bankruptcy Court for Central District of Illinois held that a lien release provision in a debtor’s chapter 13 plan only released a secured creditor’s lien as to the debtor’s interest, and did not require the secured creditor to release its lien and surrender title to the debtor’s vehicle until the remaining deficiency balance was paid in full by a non-filing co-debtor.[1] In Faulkner, a secured creditor held a lien on an SUV that the debtor co-owned with a non-filing debtor.[2] Under the debtor’s chapter 13 plan, the secured creditor’s claim was bifurcated.[3] The plan also stated that “secured creditors shall retain their liens upon their collateral until they have been paid the value of said property.”[4] After the debtor completed her plan and received her discharge, however, the secured creditor refused to return the certificate of title to the debtor’s SUV because the non-filing debtor had not satisfied the remaining deficiency balance in full.[5] The debtor responded by filing an adversary proceeding alleging that the secured creditor violated the discharge injunction.[6] The court found that “there is nothing in [section] 524 that prevent[ed the secured creditor] from asserting its rights against the non-filing co-debtor for the deficiency balance,”[7] and therefore, the secured creditor was not barred from bringing action against a non-filing co-debtor once the case was closed.[8] Thus, the court concluded that “the debtor’s plan, no matter how clear and conspicuous, can only serve to release [the secured creditors]’s lien as to the debtor’s interest in the vehicle. . . [and the secured creditor]’s lien remains in place and can be enforced against the non-filing co-debtor’s interest in the vehicle” until the entire amount owed under the contract was paid in full.[9]

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A Contract Divided

By: Chris Bolz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The United States Bankruptcy Court for the Southern District of New York held in In Re Hawker Beechcraft that the debtors were permitted under section 365 of the Bankruptcy Code to assume master agreements and some purchase orders while rejecting other purchase orders because such orders were divisible contracts.[1] The debtors were aircrafts manufactures that purchased some of their parts from a supplier.[2] In connection with these purchases, the debtors and the supplier also entered into two master agreements.[3] Under the master agreements, while the supplier agreed to manufacture parts, the debtor was not obligated to purchase any of the manufactured parts.[4] The debtors commenced their chapter 11 bankruptcy cases and ultimately confirmed a joint plan of reorganization.[5] Under the plan, the debtors would assume the master agreements and 395 purchase orders while rejecting 928 purchase orders.[6] The supplier objected to this plan, arguing that the master agreements and all of the purchase orders constituted a single indivisible contract that must be assumed or rejected cum onere.[7] The bankruptcy court, however, overruled the supplier’s objection and held that the master agreements were divisible contracts and that the purchase orders were distinctly separate contracts from one another.